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Cresa Blog

Winter Has Arrived; OpEx Reconciliations Up Next

December 9, 2016

Not long after office tenants have entered a new calendar year, an inconspicuous but impactful real estate expense statement is issued to tenants from their property managers. 

This statement is most commonly called an Operating and Real Estate Tax Expense Reconciliation, also referred to as an expense “pass-through” statement. The reconciliation statement is issued annually, and it is a determination of a tenant’s share of the building’s annual operating expense increases for the prior year. Near the end of a lease a term, these expenses can account for 5% - 15% of total office rent expenses, so making sure they are administered correctly is very important.

The attention that companies give to this expense statement varies widely. For most organizations, validating the expense statement can be a seemingly insurmountable task, made difficult by incomplete information, complicated calculations, and having an elusive property manager. As a result, many organizations resort to just paying the reconciled amount due and hoping it that is was calculated correctly.

In an ideal world, expenses are administered without error, with gross-ups, controllable expense caps, base-year amounts, and tax allocations all calculated exactly as they are written in the lease agreement.  Unfortunately, we know this is not always the case. Buildings change owners and property managers, important expense documentation can be lost, lease language can be overlooked, and seemingly straightforward calculations from the lease can be misinterpreted or administered inconsistently. During a multi-year lease, an inconspicuous error of $0.50 per SF - $1.00 per SF can multiply into large sums of incorrect charges paid by the tenant.

As if comprehending the expense calculations in the lease isn’t difficult enough for tenants, expense statements often come with very little supporting documentation, or even none at all. Every reconciliation statement should include expense categories, pro-rata share amounts, occupancy rates, and many other details that are essential to helping tenants understand their share of operating expenses. At Cresa, we understand that it can sometimes feel too imposing to ask for more information; however, tenants are always better served by validating that their expense statements are calculated in agreement with their lease. Performing an annual review of operating expenses can be a very rewarding exercise—it results in recouping any incorrectly administered charges and also serves as a reminder of any forgotten lease options and critical dates, such as a termination option or a renewal deadline.

Unfortunately, many organizations do not have the necessary resources to accurately analyze the operating expense statements and cross-check them with the lease. For many tenants, contracting an experienced, third-party industry specialist to perform an annual review of the operating expenses is the best solution. At Cresa, our Lease Compliance group has reviewed expense statements and leases throughout the United States and Canada, and our clients are organizations of all sizes, industries, and sectors. Most importantly, being integrated into Cresa’s tenant only platform allows us to pose the most pertinent questions on behalf our clients, because we never represent landlords and avoid conflicts of interest.